Mutual fund advisors will have to be prepared to take a hit on their income.
In fact, a research reports from brokerage houses on the impact of rationalization of TER suggest that AMCs would pass on the impact of TER cut to their distributors. While CLSA says that AMCs would pass on majority of this reduction to distributors, Citi report on AMCs said that fund houses could cushion lower TER impact by passing it to distributors and by lowering their promotional expenses.
Signalling that AMCs will pass on this reduction to distributors, DP Singh, ED & CMO (Domestic) SBI Mutual Fund feels that the TER rationalization is substantial and AMCs cannot take this hit. “We cannot book losses and run our businesses. We have to be profitable to sustain this business.”
Seconding Singh’s view, Suraj Kaeley, Group President - Sales & Marketing, UTI Mutual Fund said that his fund house is currently evaluating the SEBI decision on rationalization of TER. “We are awaiting for the gazette notification to come. However, it is clear that we will have to pass on the impact of this TER reduction to distributors to remain competitive in the industry. I don’t think any AMC can absorb this cut entirely on its own.”
A CEO of the foreign fund house requesting anonymity said that there is no way AMCs can absorb this cost. “I don’t think any AMC can absorb this cost. In my view, all AMCs will pass on the reduction in TER to their distributors. Also, this whole issue of TER reduction has come due to high commission payouts to distributors. If we continue to compensate distributors with the current commission structure, SEBI will not take time to cut the TER again.”
On upfronting of trail commission in SIP, he said, “SEBI has still allowed fund houses to do upfronting of trail commission on SIPs. I think this would again give rise to unethical practices in the industry. If you are banning upfront commission then ban it completely. ”
Sunil Subramaniam, MD and CEO, Sundaram Mutual Fund declined to comment on this and said, “This is a commercial decision between the fund house and distributors. We will take a call on this once we have the final circular on this.”
Similarly, Jimmy Patel, CEO, Quantum Mutual Fund said that AMCs will have to follow uniform norms in letter and spirit. “It cannot be a situation where a few AMCs are absorbing reduction in TER and a few are passing on its impact completely to distributors. In my view, the industry should follow a uniform norm in letter and spirit.” He however, said that they would get clarity only after SEBI comes out with the circular. “Things may change in future. We will have to wait for final circular to come before deciding anything on this issue.”
On rewards and junkets of MF distributors, Kaeley said that the industry would move from net sales to incremental assets. “Rewards to distributors is a business call of AMCs. However, since upfront commission is banned, the industry will have to shift the criteria of reward programs from net sales to incremental AUM or assets.”
Swarup Mohanty, CEO, Mirae Asset feels that reward programs and junkets will continue. “Though we never encouraged junkets, this practice will continue to exist as most AMCs fund these reward programs through marketing expenses.”
However, Patel said that AMCs could not run junkets and reward programs for their distributors anymore. “In my view, AMCs will have to disclose how they spend their marketing expenses to SEBI. Hence, I don’t think junkets will continue anymore.”
On TER of close end funds, Mohanty said that the circular is applicable for existing funds as well. “All close end funds will have to reduce their TER.”
Kaeley and Patel also believe that close end fund will have to readjust to the new regulations.
